THE issues before the Bench are - Whether the surrender of tenancy rights can be taxed as capital gains; Whether as per Section 55(2) of the Income Tax Act, the cost of acquisition of tenancy rights has to be taken as nil; Whether the compensation on surrender of tenancy rights prior to 01-04-1995, no capital gains tax is leviable and Whether the Tribunal cannot justify an order passed u/s 263 on grounds other than those mentioned by the Commissioner in the revised order itself. And the verdict goes in favour of the assessee.
Facts of the case
For AY 1994-95, the assessee was the lessee of the premises known as Dinrose Estate since 1950 on a monthly lease rent
of Rs.2,150/-. It had however subleased it in 1950 itself to its 100% subsidiary company by name M/s. Sri Rama Vilas Service Limited at a lease rental of Rs.2,150/-. The owners were receiving the lease rent from the subsidiary company itself. After 1974, there was no renewal of the lease in favour of the assessee. In 1978, the assessee company and the owners of the property agreed for execution of the lease deed directly in favour of the 100% subsidiary company M/s. Sri Rama Vilas Service Ltd. and accordingly, the deed was entered into on 28.7.1978 between the owner of the property and M/s. Sri Rama Vilas Service Ltd. In 1979, the property in question was purchased by four persons viz., B.Radhamma, B.Papa Raju, Y.Rajyalakshmi and B.V.Raju from the original owner in 1979. On 25.2.1994, the four co-owners on the one hand and the assessee and M/s. Sri Rama Vilas Service Ltd. as second and third party, entered into a Memorandum of Understanding, as per which, the assessee and M/s. Sri Rama Vilas Service Ltd. were stated to have surrendered their tenancy rights in favour of the four co-owners and in lieu of the surrender of the tenancy rights, the assessee was paid a sum of Rs.2.60 crores and M/s. Sri Rama Vilas Service Ltd., a sum of Rs.1.30 crores. It is stated that the four co-owners had sold the leased property to Madras Telephones. The tenancy was terminated on 25.2.1994. The receipt of Rs.2.60 crores as compensation on the surrender of tenancy rights was not offered as income by the assessee.
In the assessment finalised, the Assessing Authority accepted the contention of the assessee that the tenancy rights being capital in nature, the receipt of Rs.2.60 crores as compensation for the surrender of the tenancy rights could not be assessed. In exercise of the jurisdiction u/s 263 of the Act, the CIT sought to revise the order, placing reliance on the decision of the Special Bench of ITAT in Cadell Weaving Mill Co. Pvt. Ltd. Vs. Assistant Commissioner of Income-tax [1996] 217 ITR ITAT Reports 51 and the decision of the Allahabad High Court reported in [1991] 192 ITR 495 (CIT Vs. Gulab Chand).
The Tribunal overruled the objection of the Revenue to the admissibility of fresh evidence, viz., the lease deed entered in 1969 and 1978 and took the view that in a revisional proceedings u/s 263, there was no question of the assessee having any opportunity to furnish a fresh document before the Assessing Authority and the lease deeds dated 06.12.1969 and 28.08.1978 were necessary to decide the issue on hand. Thus, on going through the lease deed dated 06.12.1969, the Tribunal came to the conclusion that the assessee, as a lessee, was given a right to assign, sub-lease and part with possession of the property or any part thereof. As far as the document dated 28.8.1978 with SRVS and the original owner was concerned, the Tribunal arrived at a factual finding that the deed did not refer to continuation of any lease right to the assessee herein and for all intended purposes, SRVS was the lessee to the exclusion of others and the lease rentals were paid directly to the owner of the property. In considering the contention of the Revenue that the document dated 25.02.1994 never recognised SRVS as a tenant and that they had also filed a suit against SRVS, the Tribunal pointed out that the filing of the suit was a matter which was not denied by the assessee and the owners had filed an eviction suit against SRVS.
As far as the initiation of proceedings u/s 263 of the Income Tax Act was concerned, the Tribunal pointed out that the entire order proceeded on the premise that the tenancy rights of the assessee was personal in nature, which could not be transferred to any other person, and hence not capital. On a reading of the agreement dated 25.02.1994 between the assessee, sister concern and the purchaser/owner, the Tribunal held that the two companies were recognised by the purchaser/owner as tenants. The Tribunal held that the Assessing Authority and the CIT proceeded on the admitted fact that the assessee had tenancy rights. In the background of the said fact and that the decision of the Special Bench relied on by the CIT was overruled by the decision of the Bombay High Court in the decision reported in [2001] 249 ITR 265 (Cadell Weaving Mill Co. P. Ltd. Vs. CIT), the order of the CIT u/s 263 was liable to be set aside and the assessee's appeal allowed, treating the right as a capital asset and the receipt as capital in nature. The said decision was confirmed in the decision reported in CIT Vs. D.P.Sandu Bros. Chembur P. Ltd. (SC) (2005-TIOL-17-SC-IT-LB). Thus the reasoning of the Commissioner based on the Special Bench's view thus having been found overruled, the Tribunal rejected the contention of the Revenue holding that the assessment order was prejudicial to the interests of the Revenue.
The Tribunal held that the said view could not be upheld, considering the admitted fact on the tenancy right of the assessee. The Tribunal held that the correctness or otherwise of the order of the CIT could be considered only on the grounds considered by the Commissioner for revision and nothing more. When the assessee was able to satisfy the Tribunal that the grounds for the decision given by the Commissioner were wrong on facts or not tenable in law, the Tribunal had every jurisdiction to set aside the order of the Commissioner. Thus the Tribunal viewed that when the assessee had satisfied the Tribunal that the grounds for the decision given by the CIT (Revision) could not be upheld, the appeal had to be allowed. The Tribunal pointed out that given the admitted fact that the assessee was treated as a tenant and the entire proceedings before the Commissioner went on that premise, it was no longer open to the Revenue to take a different view. Following the decision of the Karnataka High Court reported in [1991] 192 ITR 547 (Commissioner of Income-tax v. D'Silva (L.F.), which, in turn, followed the decision reported in [1983] 140 ITR 490 (Commissioner of Income-tax vs. Jagadhri Electric Supply and Industrial Co.), the Tribunal rejected the Revenue's contention.
On further appeal by the Revenue, the High Court held that,
++ The contention of the assessee is two fold, viz., given the fact that the CIT has jurisdiction to revise the orders which are prejudicial to the Revenue, and for this purpose, Section 263 requires the Commissioner to call for and examine the records available at the time of examination by the Commissioner. On a perusal of the notice of revision u/s 263, it is clear that the Commissioner intended to revise the order of the Assessing Authority on the admitted fact position that he was a tenant, based on the decision of the Special Bench. It is a matter of record that the only ground on which the Commissioner exercised his jurisdiction to interfere with the order was that the assessee was not having any right to transfer its interest in tenancy and hence, rights being personal, the compensation received has to be considered as income assessable at the hands of the assessee.
++ it is rather surprising to note that the Revenue went on a diametrically different factual plane to contend that the assessee could not be treated as a tenant, by reason of the document dated 28.08.1978 entered into between the assessee's subsidiary company and the vendor. Standing Counsel pointed out that there is no reference at all in the said document as to the assessee being considered as a tenant under the owner. If the Revenue's contention on facts has to be accepted, the very basis of the Section 263 order fails, in which event, the entire order of the Commissioner has to be set aside. As already pointed out, whatever might have been the terms of understanding under the document dated 28.08.1978, as far as the present case is concerned, the right to receive compensation is traceable to the document dated 25.02.1994. Consequently, it is not open to the Revenue to contend that the order of the Commissioner could be sustained on a different fact situation, a position which is not open to the Revenue to contend so.
++ if an order had been made on a particular factual position, the Revenue cannot sustain the order by varying the vary basis of the order to contend that the facts are otherwise. In the circumstances, the contention of the Revenue was rejected, thereby the Tribunal was not right in not entertaining fresh grounds taken by the Revenue.
++ As regards the relief to be considered u/s 55(2) of the Income Tax Act, the Supreme Court, in the decision reported in [2005] 273 ITR 1 (CIT Vs. D.P.Sandu Bros. Chembur P. Ltd. (SC) = (2005-TIOL-17-SC-IT-LB), confirmed the view of the Bombay High Court reported in [2001] 249 ITR 265 (Cadell Weaving Mill Co. P. Ltd. Vs. CIT). A reading of the judgment of the Apex Court shows that the amendment of Section 55(2) took effect from 1st April 1995. Till the amendment of law was there, if the cost of acquisition could not, in fact, be determined, the transfer of capital assets could not attract capital gains.
++ The Apex Court pointed out that tenancy right is a capital asset, the surrender of tenancy right is a transfer and the consideration received therefore is a capital receipt within the meaning of Section 45, had not been questioned before the Supreme Court and that in any event, the said proposition was taken to have been concluded by the decision of the Apex Court reported in [1991] 192 ITR 382 (A.Gasper Vs. CIT). Thus the consideration on tenancy rights, normally, would be subjected to capital gains u/s 45 of the Income Tax Act.
++ having regard to the unworkability of the provisions and that Section 55 itself was introduced relevant only to the subsequent AY, namely, 1995-96, the Apex Court held that till the amendment in 1995, the compensation received on surrendering the tenancy rights could not be assessed to capital gains. Thus, on the fact position as found by the Tribunal and which form the very basis of the order u/s 263 that the assessee was treated as tenants as per the document dated 25.02.1994, the genuineness of which was never questioned by the Revenue, we have no hesitation in confirming the order of the Tribunal. In the above circumstances, the questions raised by the Revenue was rejected.
++ As far as the questions raised now before this Court are concerned, they do not deserve any consideration, considering the fact position which was admitted by the Commissioner while passing the order u/s 263 of the Income Tax Act. In the result, the Tax Case Appeal stands dismissed.
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